My most recent books are the Leader's Guide to Radical Management (2010), The Leader's Guide to Storytelling (2nd ed, 2011) and The Secret Language of Leadership (2007). I consult with organizations around the world on leadership, innovation, management and business narrative. At the World Bank, I held many management positions, including director of knowledge management (1996-2000). I am currently a director of the Scrum Alliance, an Amazon Affiliate and a fellow of the Lean Software Society. You can follow me on Twitter at @stevedenning. My website is at www.stevedenning.com.

Whole Foods And The Triumph Of Customer Capitalism

Ever been in a large supermarket and you can’t find an unusual item? And when you ask one of the staff who is doing something else, like stacking products on the shelf, you are told, “I dunno,” or “Try aisle five,” or “Sorry, not my section”?

Not at Whole Foods [WFM].

When I shop there and I ask for help from any of the workers as to where I might find an obscure product like demi-glace sauce or frozen pate feuilletée or dark tapenade he or she invariably stops doing the current task and helps me solve my problem. I am impressed that the worker usually know what the obscure product is—a good start—and also where it is located. And then they walk me to the part of the store where I can find the product, even if it means going to the other end of the store and point to it.

Never a moment’s hesitation. The same response even if they are deeply involved in some other task. Always gracious. Never irritated at the request. Never an excuse like “it’s not my section”. Or “Try aisle five.” Even when I protest that there is really no need to walk me there, just tell me which aisle, they insist on walking me to the exact spot and pointing to my item. Remarkable!

Now Whole Foods isn’t perfect. My beefs include: why no self-checkout? And why not even more local products than they have? Other customers complain that Whole Foods big stores feel impersonal and should be offering even more help to the community. But in shopping there, I as a customer can’t help getting the feeling that customers come first. Obviously Whole Foods does different things for lots of different stakeholders. But shopping there gives me as a customer the sense that Whole Foods is there for me.

Whole Food has a single goal: customer value

This feeling is not entirely surprising since Whole Foods itself declares that its goal is to put customers first. The following from Wikipedia is a fair summary of a complex subject:

Walter Robb, Whole Foods Market Co-CEO, details the company’s core values: “The deepest core of Whole Foods, the heartbeat, if you will, is this mission, this stakeholder philosophy: customers first, then team members, balanced with what’s good for other stakeholders, such as shareholders, vendors, the community, and the environment.

CEO John Mackey describes how the stakeholder philosophy combines with capitalism: “We’ve always been unique in that we have a stakeholder philosophy, and it continues to guide us,” Mackey says. “The beauty, in my opinion, of capitalism is that it has a harmony of interests. All these stakeholders are important. It is important that the owners and workers cooperate to provide value for the customer. That’s what all business is about, and I’d say that’s a beautiful thing.”

I think it’s fair to say that Whole Foods takes into account many stakeholder interests but it has a single goal, focused on delivering value for customers.

This is very different from the traditional strategy of a company like, say, Safeway [SFW] which focuses on making money and maximizing shareholder value.

Customer capitalism

In my article last week, Is The Tyranny of Shareholder Value Finally Ending?, I noted that shareholder value is dying. Astute observers are coming to the conclusion that capitalism’s future lies with firms like Whole Foods that are pursuing customer capitalism—a single-minded pursuit of adding value for customers, communicated and implemented systematically throughout the organization.

What about stakeholder capitalism?

Not everyone agreed. Some suggested that I had overlooked stakeholder capitalism. For instance, Jeremy Arnone wrote that a singular focus on the customer will sometimes conflict with other constituents’ interests such as employees. Hence a balance of different interests needed to be struck. An “exclusive focus” on customers was just as problematic as shareholder value.

Another reader wrote that the possibility of sustainably successful companies with multiple goals should not be excluded. When asked to give examples of such firms, my correspondent suggested Whole Foods [WFM].

The case of Whole Foods is interesting. It’s a grocery chain that has over 300 stores and around 54,000 employees and sales of about eight billion dollars a year. Although it is only 1 percent of the supermarket sector in the US, its impact has been massive. Much has been written about it, including the chapter in Gary Hamel’s classic book, The Future of Management (2007) and Nick Paumgarten’s brilliant New Yorker 2010 article, Does Whole Foods’ C.E.O. know what’s best for you?

Both shareholder and customer capitalism are very different from stakeholder capitalism in which an organization that leaves it up to each individual manager and worker to balance different interests and decide in each instance whose interests should be given priority.

As I explained in last week’s article, stakeholder capitalism, in which multiple interests are continuously balanced, is a way of managing that died forty years ago because it led to management paralysis and the confusion of “garbage can” organizations that couldn’t make decisions.

How many goals does Whole Foods have?

Whole Foods is often cited as a firm that is pursuing multiple goals and balancing the needs of different constituencies—customers, workers, community and the environment as well as the demands of shareholders. And it’s true that Whole Foods executives often talk about their multiple stakeholders.

So how many goals does Whole Foods have? When I read what the executives say and observe how the firm operates, my count is one–provide value for the customer, by the owners and workers cooperating to provide value for customers with natural foods, i.e. put customers first.

Putting customers first doesn’t mean ignoring all the other stakeholders. In fact, the interests of other stakeholders are very explicitly incorporated into Whole Foods’s goal of customers first. When managers and workers are faced with a conflict between different interests, they don’t have to make a calculation each time and weigh up which interest comes first. The answer has already been decided: customers first.

Customer capitalism isn’t “doing whatever the customer wants”

Some critics say that an “exclusive” focus on customers would be stupid. I agree. If Whole Foods were to treat its employees and suppliers badly, it would never get from them the consistent and dedicated commitment to the mission of the firm that is needed to delights me as a customer.

Nor is customer capitalism simply “doing whatever the customer wants”. Whole Foods aims at providing certain kinds of products and services for a certain kind of customer—people who want good, healthy food. If you are not that kind of customer, then Whole Foods is not the store for you. For instance, there is no point in a customer asking Whole Foods to stock more varieties of unhealthy cheap junk food: John Mackey’s mission is to wean the world of these bad eating habits, and Whole Foods not about to start encouraging them.

Nor is a customer likely to have much luck in asking Whole Foods to stock cleaning products in bulk. You can buy the odd paper towel, but if you want bulk cleaning products, go to Costco [COST], the membership warehouse club chain.

But you can ask, as many customers did, a few years ago, for Whole Foods to procure more from local producers and get a positive response. Whole Foods does most of its purchasing occurs at the regional and national levels to negotiate volume discounts with major vendors and distributors. But it has been putting a steadily increasing emphasis on local products and farms. A visit to my local store yesterday revealed an array of the fruits and vegetables coming from four different farms in our area.

‘Customers first’ is decided in advance

The impact of having a single goal plays out on a daily basis. If Whole Foods were to rely on individual managers or workers to decide in each instance whether my need as a customer to find an item should take priority over what they are currently doing, I would likely end up getting a variety of answers, and only rarely would the workers or managers decide that it was worth dropping whatever they were doing and pointing me to where the product could be found.

Responding to a customer slows down the workers doing their immediate work, adding to the costs of getting their job done, and in short run, making them less efficient, and thus possibly making less money for shareholders. If it was left to the worker or the local manager, they might decide that it was more profitable to keep doing what they are doing and not help customers. But Whole Foods as an organization has made that decision in advance. It has decided that being less efficient on the immediate task in order to meet customers’ immediate needs is a better strategy–and more profitable—in the long run.

The experience that I have in the local Safeway is markedly different. If I ask a worker there doing something else to help me find an obscure product, the first result is that the worker usually don’t know what I am talking about, let alone where the product might be. At best, they hazard a guess, “Frozen foods are on aisle five,” or just, “Why don’t you ask at the front desk.” There is no indication that they feel it their job to help me get to a solution: that is someone else’s job. Delighting customers is not the universal modus operandi of Safeway, even though some individual workers are helpful to me from time to time.

The disgruntlement of the staff at Safeway at the way they are treated is almost always visible. They clearly feel they are being used, i.e. “employees” in a literal sense. I rarely come across anyone who loves what they do. This is not surprising in an economy where only one in five workers is fully engaged in his or her work. I shop at Safewhat when I have to, not because I want to. The financial results of the two modes of operation are dramatically different.

The financial returns of a focus on customer delight

The focus on customers first doesn’t hurt Whole Foods’s bottom line. The ten year share price of Whole Foods [WFM] is up 330 percent, compared +30 percent for the S&P 500, and minus 40 percent for atraditionally managed supermarket chain like Safeway [SFW]. The difference is dramatic.

What do we mean by a single goal?

The confusion as to whether Whole Foods has one goal or multiple goals may depend in part on what is meant by the word, “goal”. When I say “goal”, I am talking about the something that is the guiding star of the organization, a driving force, something to which the organization is continuously devoted. The heartbeat. The deepest core. Something the firm does without thinking, not something that comes and goes or that requires a lot of thinking. It is something that is lived on a day to day basis, by everyone in the organization.

If you adopt a less stringent definition of “goal”, like “something that the company cares about,” then obviously Whole Foods has lots of goals. So we might be tempted to say, it’s just a matter of different words and definitions. It could be argued that we’re just arguing about words. No big deal.

But we are not just arguing about words. We are talking about a difference in objective reality about how the firm operates, which is a very big deal indeed. We are talking about different kinds of companies with different kinds of behaviors and impacts and dynamics and outcomes.

The options for capitalism

I agree that stakeholder capitalism remains a theoretical possibility for organizations to pursue. Firms might decide to pursue multiple goals and meeting the needs of multiple stakeholders and deciding on a case-by-case basis which one should have priority. The problem is that this is simply not a very effective way to run an organization.

Stakeholder capitalism was tried out in many organizations for several decades in the US from 1932 to 1970, and the poor results led to its demise. Giving it another try on a significant scale is unlikely. There is a simple reason: the stock market won’t tolerate it: a lack of focus will be severely punished in the stock price.

Meanwhile, shareholder capitalism is dying, because of the economics. Firms focused on shareholder value like Safeway are being steadily put out of business by firms like Whole Foods that focus on customer value.

Customer capitalism is opening up a whole new economic future for the economy—better for the customers, the workers and the firm. The question is not whether, but when.

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What I wonder about most in your book on Radical Management and here in your blog how is it possible to forget that customer has always been at the center of any economy, even many centuries ago. Producing and trading of goods put the customer first, even in ancient times. How it was possible to forget this golden rule in modern days?

My origin is from a former communist country where the customer was also forgotten. After the collapse of the communism, two things happened.

On one side, big state-owned companies was privatized in a process more like a robbery from greedyand corrupted politicians, that have only in mind to become rich. Almost all of these companies have had a very painful death.

On the other side, some new small entrepreneurs start doing business in hope that they can find new employment, after they lost their jobs in the state owned companies. They always were friendly and very supportive to their customers, even allowing them to pay later, when they have money, risking their own fortune. Only those who was won the customer’s trust were was smart enough to win the hard battle.

Many years ago I was lucky to leave my country to the West, but I still can’t understand how some big companies and shops are so impolite, so unsupportive of their customers. Some of them even try to rob them with goods and services with questionable conditions. I am sure that for some of them a painful death is inevitable, but I hope some them will change for good of all of us customers.

Thanks for these insightful. The centrality of the customer is a very old idea, as you point out. When the market consisted of a lot of small firms, that was obvious. When there were a few big oligopolies dominating the market, as in the US in the middle of the 20th Century, the firms began to imagine that they were in charge of the market. What’s new is that the balance of power has shifted from seller to buyer with globalization and the Internet. So now once again firms have to pay attention to customers again. The customer is now the 800 pound gorilla, as one reader put it, not the firm.

I enjoyed your piece. However the answer to “what works” is not found in the difference between customer, stakeholder, and shareholder capitalism, but rather in what Mackey refers to as “conscious capitalism” (http://www.consciouscapitalism.org). I’m attending the sixth annual conscious capitalism CEO Summit next month with a few of my clients. You should join us.

Thanks for your comment. I certainly agree that the answer to “what works” does not lie stakeholder capitalism or shareholder capitalism.

John Mackey has described what he is doing quite well: ““The beauty, in my opinion, of capitalism is that it has a harmony of interests. All these stakeholders are important. It is important that the owners and workers cooperate to provide value for the customer. That’s what all business is about.”

We can discuss what label we want to apply to that. You might call it conscious capitalism. Richard Florida might call it the Creative Economy. Roger Martin might call it customer capitalism. Ranjay Gulati might call it organizing for resilience. I have tended to use the term, radical management.

What’s more important than arguing about labels to apply is to realize, first, the commonalities in substance of all these viewpoints, and second, the huge differences between all these viewpoints on the one hand, and, on the other hand, the traditional management focused on making money and maximizing shareholder value, as still taught in most business schools and practiced by the Fortune 500.

Thanks for calling out the power of customer capitalism. Practicing it certainly brought vitality to a company like Whole Foods and emulating it is good practical advice – appreciate your thought leadership on this.

Your article made me wonder about a couple of things. - Putting the customer first makes transparency even more important. Through thick and thin, John Mackey has always been open and transparent; sometimes to his own detriment. Is one reason we don’t see more retailers rushing to the “customer first” goal a concern about being too transparent? We saw some of this in a recent Brick Meets Click blog on “What the C-suite needs to do about social media”. http://www.brickmeetsclick.com/what-the-c-suite-needs-to-do-about-social-media - Will the growth of customer capitalism shift “economic surplus” from retailers to customers and, in the process, increase competition among retailers while benefitting consumers? It feels like it will. If that happens, what’s the advice you offer to retailers who want to survive and prosper in that emerging new marketplace?

Thanks for your comment and your questions to which my answers are pretty simple.

What to do about transparency? It’s here, come what may. Retailers have to learn to deal with it. Everyone knows everything. Count on it.

What’s the advice I offer to retailers who want to survive and prosper in that emerging new marketplace? Delight your customers! There’s no other way to survive.

Those are pretty simple answers. Implementing them of course is a huge challenge. That’s why I’ve written a book and literally thousands of pages on this blog to give more details on how to go about it. But the gist of it is very clear and very simple.